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QUESTION 12

1. Firm B plans to acquire firm T. Both firms have no debt. B believes the acquisition will increase its total after-tax annual cash flow by $1.6 million for the next three years and then it decreases to 1.2 million, indefinitely. The appropriate discount rate for the incremental cash flows is 12%.

   The pre-merger information about firm B and target firm T is:

   	Firm B	Firm T
   Shares outstanding	450,000	240,000
   Price per share	$62	$45

   Firm B gives two offers to Firm T. First, Firm B offers $48 per share in cash. Second, it offers three of its shares for every five of T s shares.

   1. What is the synergy from acquiring firm T?

   2. What is the bidder premium for cash offer?

   3. Which offer will the target firm accept?

   4. At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers?